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Hawaii’s Insurance Commissioner caused a brief kerfuffle a few weeks ago when, shortly after the beginning of the most recent eruption of the volcano on the island of Hawaii, he announced that all the damage to homes and buildings caused by the eruption was covered by insurance. His reasoning was that when lava engulfed a building it first set it on fire, and fire of course is an insured peril. The Governor of Hawaii also followed on with similar comments.
Neither of them were anywhere close to being correct, and someone eventually got to them with some facts. Insurance coverage for loss from volcanic eruption is a particularly complicated question. Fire is covered, of course, but if your building is buried under molten lava it’s the lava that destroyed it, not fire. There are also earthquakes, fissures, toxic gases, ash and assorted other things happening near erupting volcanoes. Those few insurers that will write insurance in a volcano zone, unsurprisingly, exclude claims from volcanic activity unless coverage is specifically purchased. Even the Hawaii state insurance company of last resort, which will cover some of these perils, charges a separate, very expensive premium for it, which most policyholders reportedly didn’t buy (because, as you might expect, volcano insurance for a building built on a volcano isn’t cheap).
Most people don’t live or work on volcanos so we can draw only limited insight from this example, but it raises interesting questions, namely, what insurance can or should respond to the various types of natural disasters so much in the news lately. One of the main lessons learned from such events over the past year or so was that most businesses and individuals were not properly insured and simply not prepared for these mostly predictable events. So, here’s a quick rundown by natural catastrophe type, with a quick review of the types of insurance available to cover them:
Floods: The flood peril is similar to the volcano peril in that the insurance market has efficiently identified areas prone to loss, and decided it doesn’t want to offer flood insurance in places where the risk of a flood loss nears certainty.
Nevertheless, people like to live near water, and continue to build homes and businesses in areas prone to flooding. The problem is that loss from flooding is excluded on all standard property policies, and buying flood insurance for properties located in known floods zones is difficult. The National Flood Insurance Program (NFIP) provides some coverage, at government subsidized, consumer friendly rates. When political considerations clash with actuarial science the results are rarely good, and predictably, the NFIP is underwater by billions of dollars because they (wait for it) didn’t charge premiums commensurate with the risk. It’s paid out far more in flood losses than it received in premiums, leading to federal bailouts and pressure to reform the program.
Even so, NFIP flood insurance is severely limited in scope of coverage and amounts available. Commercial property insurance buyers can find flood insurance pretty easily for properties not in flood zones; some private market coverage may also be found for flood exposed properties. We have several insurers willing to provide excess flood policies over underlying NFIP policies, but as you might expect, it’s costly. As a result of all this complication, though, risk of loss from flooding is probably the single most widespread un- or underinsured loss exposure in the U.S.
Hurricanes: Much in the news last year, hurricanes, and typhoons, nor’easters and similar storm events however named, all feature two major causes of loss, wind and water. Wind damage is covered under standard property policies. Some water damage is also covered; if storm winds blow the roof off your building and rain enters and soaks everything, that’s covered, too. But if a coastal storm surge or protracted rainfall results in general flooding, standard policies don’t cover that flood water damage.
Property underwriters continue to offer wind coverage, although in hurricane exposed coastal areas higher wind deductibles are common. While wind deductibles may be painful, premiums generally remain reasonable. The other good news is that since standard policies cover wind loss, other property risks (notably business income coverages) are also covered. And where wind is a real issue we can provide stand-alone policies if needed.
Wildfires: Also much in the news the past couple of years, fire is the basic property insurance peril. Underwriters are looking more carefully at some areas, and pricing for more exposed locations might be up, but insurance is available and coverage is generally broad if you want it.
Tornados: In parts of the country these are reliably recurring events every year, although they have been reported in every state in the U.S. These are usually all about wind damage, and generally covered without limitation as a standard property insurance peril.
Earthquakes: Another big risk, but again, mostly in certain well defined areas. Earthquake and earth movement (think mudslides) are standard exclusions on property policies. Coverage is available, even in earthquake zones, but you have to specifically buy it if you want it. It will likely be expensive, with large deductibles. Underwriters will also generally include business income coverage, and if you think about it, the potential for protracted business interruption following an earthquake is potentially a greater risk than direct property damage.
Hailstorms: This one often flies below the radar, but these can cause widespread damage; most recently a Spring hailstorm near Dallas is estimated to have caused $1 billion of damage. The good news is that standard property policies cover these types of claims.
Others: There are other potential loss sources from naturally occurring events to consider; think sinkholes or mudslides as an example. Often state specific insurance regulations will apply to these generally localized risks, so they need specific consideration.
And finally, Locusts: Sorry, no coverage, under the standard insect and vermin exclusion in policies. If you are hit by a plague of them, you’re out of luck.
Conclusion: There is insurance available for almost all of the naturally occurring phenomena that could lead to catastrophic property loss. Standard property policies are actually quite broad in the scope of coverage they provide. If your property is located on a volcano, in a flood zone, or in an earthquake fault zone, coverage won’t be cheap or easy to buy, but it’s probably available.
The key is planning. Don’t assume anything. We live in changing times, and we are seeing widespread natural catastrophes with increasing frequency in every corner of the country. Give us a call and let’s sit down to review your disaster preparedness and insurance coverages. A little advance planning can pay big dividends if something does happen.